Pepsi 2006 Annual Report Download - page 43

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Our Assumptions
Our Black-Scholes model estimates the expected value our employees will
receive from the options based on a number of assumptions, such as interest
rates, employee exercises, our stock price and dividend yield. Our weighted-
average fair value assumptions include:
Estimated 2007 2006 2005 2004
Expected life 6 yrs. 6 yrs. 6 yrs. 6 yrs.
Risk free interest rate 5.7% 4.5% 3.8% 3.3%
Expected volatility 18% 18% 23% 26%
Expected dividend yield 1.9% 1.9% 1.8% 1.8%
2007 Estimated Expense and Sensitivity of Assumptions
Our stock-based compensation expense, including RSUs, is as follows:
Estimated 2007 2006 2005
Stock-based compensation expense $271 $270 $311
If we assumed a 100-basis-point change in the following assumptions, our estimated
2007 stock-based compensation expense would increase/(decrease) as follows:
100-Basis-Point Increase 100-Basis-Point Decrease
Risk free interest rate $6 $(6)
Expected volatility $1 $(1)
Expected dividend yield $(9) $10
The expected life is a significant
assumption as it determines the period
for which the risk free interest rate,
volatility and dividend yield must be
applied. The expected life is the period
over which our employee groups are
expected to hold their options. It is
based on our historical experience with
similar grants. The risk free interest rate
is based on the expected U.S. Treasury
rate over the expected life. Volatility
reflects movements in our stock price
over the most recent historical period
equivalent to the expected life.
Dividend yield is estimated over the
expected life based on our stated divi-
dend policy and forecasts of net income,
share repurchases and stock price.
If the expected life were assumed to
be one year longer, our estimated 2007
stock-based compensation expense
would increase by $7 million. If the
expected life were assumed to be one
year shorter, our estimated 2007 stock-
based compensation expense would
decrease by $8 million. As noted, chang-
ing the assumed expected life impacts
all of the Black-Scholes valuation
assumptions as the risk free interest
rate, expected volatility and expected
dividend yield are estimated over the
expected life.
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